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Tesla China: Automaker hits another ‘bump in the road’ with massive recall

bynewsdesk
June 28, 2021

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Almost all vehicles Elon Musk’s electric car maker has built and sold in China since opening a Gigafactory in Shanghai be recalled about concerns about the cruise control system.
The problem, according to Chinese regulators, is that the system can be accidentally activated in certain models, resulting in unintended acceleration. The recall includes 35,665 imported Model 3 vehicles and 249,855 Model 3 and Model Y vehicles made at the Shanghai factory, or nearly any locally made car Tesla (TSLA) has been sold in China since January 2020.

Tesla apologized this weekend for the recall, adding that it would “strictly follow national regulations and continue to improve our safety protections.”

And the setback isn’t as damaging as a conventional recall, as it could be resolved by a software update that would not require customers to return their cars, according to Tu Le, founder of Beijing-based consulting firm Sino Auto Insights.

“It’s just a band-aid,” he said. “Most [customers] probably won’t know anything happened to their car.”

Still, the magnitude of the problem is a “black eye” for Tesla, according to Daniel Ives, a director of equity research at Wedbush Securities, who noted the announcement comes after a series of controversies for the automaker.
The company was recently the target of a protest at the country’s largest auto show in Shanghai by Tesla owners, who complained about problems with their cars. Regulators have also questioned the quality of Tesla’s Shanghai-made Model 3s, and there have been reports of increased scrutiny of the company by the Chinese military.

“Let’s be clear: this is not the news bulls want to see as it contributes to the negative PR issues in China,” Ives wrote in a note to clients on Sunday. Musk has predicted that the world’s largest auto market could eventually become Tesla’s most important as well.

The interior of a Tesla Model 3 seen inside a Tesla store at a Beijing mall on May 26.

Need for a ‘smoother road’

China is not Tesla’s only concern. The company’s shares are down about 25% from a peak in the past year as it struggles with short sellers and concerns about its management bank.

But the series of debacles in China is not helping. At the Shanghai Auto Show in April, the company’s booth was briefly besieged by protesters, with a woman climbing atop a Tesla vehicle to claim her car had faulty brakes. The company initially annoyed customers with its response, which had vowed to allay concerns but “not compromise with unreasonable demands.”

After facing criticism, Tesla later apologized to “car owners” and vowed to “conduct strict self-examination and self-correction while cooperating with the investigation of relevant government agencies.”

Protesters put Tesla to the fore at China's most important auto show

That firestorm seemed to put a dent in the company’s sales, albeit short-lived.

In April, the electric car leader sold fewer than 26,000 vehicles in China, down 27% from March, according to figures released by the China Passenger Car Association (CPCA).

“The cumulative effects of negative publicity have affected them,” Le said, noting that Tesla’s problems “without a doubt” gave its competitors an opening. Chinese electric vehicle manufacturers such as: nio, (NIO) xpeng (XPEV), and Li Auto (AT THE), for example, all reported improved domestic sales over that period.

Last month, however, Tesla sales soared to more than 33,000 units, according to the CPCA.

Ives said he believes the recall is “a bump in the road and won’t derail the short-term or long-term bull thesis for Tesla China.”

Two men sit in a Tesla Model 3 in a Tesla store in Beijing in May.

“However, in the future, it must be a smoother path for autopilot safety, otherwise the PR black cloud will continue,” he added.

Tesla has tried to appease officials in China by addressing criticism. Last month it announced it had set up a new data center in mainland China to keep all the data it collects from locally sold cars within its borders, a move that came as the company was faced with the question of whether its cars would ever be sold before espionage could be used.
Even Musk has stepped in and reassured officials about the company’s “future in China.”

But some analysts are calling on the company to do more. In his note dated Sunday, Ives said the responsibility lay with the CEO and his team to make sure “these issues are in the rearview mirror”.

Le also said the automaker should focus on building more goodwill in the country by doubling down on customer service and improving ties with authorities.

“If I were hired by Tesla… I would be the first to say, ‘[Let’s] try to take someone from Volkswagen or GM who has the longest tenure in China from the government relations team,” he said.

CNN’s Beijing office and Philip Wang contributed to this report.

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